2025 U.K. Property Outlook: Survive or Thrive?

As we move through Q1, 2025 promises to be an eventful year with the challenging U.K. economic environment, the implications of a new U.S. government administration, and various European countries in political turmoil. This environment sets the stage for several key factors that will influence the U.K. real estate markets in the months ahead.

Global Markets Uncertainty

The new Trump administration has introduced tariffs to some of its main trading partners, including China, Canada and Mexico. These barriers to trade are expected to impact global economies, especially for sectors such as food, cars and manufacturing, where materials are sourced from various countries. Mexico is the largest source of fresh produce in the U.S., with 60% of U.S. vegetable imports originating there, plus nearly half of all fruit and nut imports. The expectation is for increased cost for food produce in the short to medium term. Tariffs are generally expected to lead to weaker economic growth across North American countries with an increasing risk of inflation returning in the U.S., likely to ensure higher-for-longer U.S. interest rates, and increased cost of borrowing. In addition, the Sterling is anticipated to lose value against the dollar, meaning higher import prices and a potential return of inflation in the U.K. This will leave the Bank of England with some difficult decisions to make over domestic interest rates in the months ahead.

Interest Rates & The U.K. Economy

After the recent peak at 5.25%, the Bank of England base rate has crept down to the current 4.75%, with forecasts for further reductions of circa 100 basis points across 2025 and into 2026. This would be a welcome decrease to the cost of borrowing and would support increased transactional activity, however, the timing of any future reductions remains unclear. The new government’s autumn budget has received a mixed reception. Economic forecasts are generally predicting GDP growth, however there is much debate over the expected level through the year and this is likely to be affected by activity in the U.S. with the recent announcement of tariffs. The rise in employers’ National Insurance contributions and the minimum wage have caused companies to revisit plans for hiring and likely increases in these costs will feed through to higher prices or reduced spending, targeted to preserve operating margins. Nonetheless, if borrowing costs were to continue their downward trajectory, consumers will begin to feel the impact to their wallets and, providing inflation remains benign, there are grounds for cautious optimism. Much will depend on the impact of the U.S. tariffs on the U.K. and its trading parties.

Retail

The retail sector continues to be a challenging environment for operators. The impact of inflation on the cost of living has led to low consumer demand, with the public seeking low prices, often via e-commerce portals, rather than hitting the high streets. To attract consumers back to their stores, operators are having to be more creative in their offerings, with experiential retail becoming more popular via destinations that can combine food, leisure and entertainment pursuits with traditional retail. The more progressive property owners and landlords have identified the creative opportunity to reimagine their retail spaces as part of a wider lifestyle offering. High streets in prominent and affluent areas are becoming social hubs, with collaborative workspaces, market halls and public event areas. The challenge will be for those secondary and tertiary locations where footfall is down and the local high street struggles to remain relevant in the face of online retailers. It is here where we consider the retail struggles will be more acute.

Offices

The dust continues to settle on the changes to work patterns in the wake of the COVID-19 pandemic. Remote and hybrid working practices have reshaped the demand for office space, which has led to the growth of flexible terms for those occupiers unwilling to commit to long leases. London and other regional centres remain a draw, with companies sourcing well-connected hubs for their operations. Location is key, and quality accommodation with flexibility and sustainability features will always attract demand and premium rents. Minimum Energy Efficiency Standards regulation is due to come into effect for all commercial buildings by 2030, with a minimum rating of EPC Grade B or higher required. Legacy assets for which it is not economically viable to improve to meet these standards, or are in tertiary locations, run the risk of becoming ‘stranded assets’, presenting a strategic challenge to landlords. Asset management will be key to either improve and upgrade, or to repurpose the accommodation to meet the changing expectations of tenants. Those buildings which cannot be improved offer opportunities for wholesale redevelopment.

Sustainability & ESG

Commercial real estate buildings are one of the largest global producers of carbon emissions. Both tenants and landlords are increasingly committed to accommodation that offers sustainable features and moves towards net-zero carbon targets. The Minimum Energy Efficiency Standards will require a minimum rating of EPC Grade B or higher by 2030, which has further focussed this shift to low energy buildings. Investors have taken note, and this shift is being driven by both the occupiers and landlords, with tenants seeking ESG aligned accommodation to satisfy both their staff and corporate sustainability goals, whilst landlords are striving to gain the ‘green premium’ that comes from high BREEAM and EPC ratings. Research has shown capital values for BREEAM certification were on average circa 20% higher. Since buildings that do not meet the incoming EPC rating requirements will be unlettable after 2030, the focus on sustainability will become more pronounced. In turn, tenants are focused on low energy costs and increasingly prefer greener, more socially responsible buildings.

Smart Buildings & AI

The rapidly moving technology promises to impact on how commercial property is managed, valued and leased. 2025 could see the dawn of a new age of PropTech and changes to how buildings are operated. Building management systems will allow property managers to remotely monitor and control various systems, such as HVAC, lighting, and security, seeking to optimise energy use and reduce operating costs. Real-time data on building performance increasingly allows landlords to improve energy efficiency, reduce waste, and meet regulatory standards for carbon emissions. For tenants, smart building features, like occupancy sensors, personalised climate controls, and advanced security systems are expected to enhance the workplace experience, increasing tenant satisfaction and retention. AI promises to process vast amounts of data to provide real time property valuations and strategies for investors. By analysing property data, market trends and macroeconomic indicators, AI offers the ability to predict future property values with greater precision, assisting investors and streamlining the decision-making process. The impact of these technologies is still to be determined, however, 2025 could be the year these changes start to come to the forefront.

Conclusion

The world faces a multitude of external factors which will have an impact across the U.K. commercial and residential property markets in 2025. It is critical to have the right partner to ‘survive or thrive’ in this dynamic environment. As experts in the commercial property industry, Gordon Brothers can be a key partner in advising clients on the options available in the current market environment and assisting in their decision-making. To learn more, reach out to one of our experts or contact us.